Newsletter – November 2011

Mergers in the world of private banking and asset management: will the stumbling blocks be avoided?
The factor triggering a wave of consolidation of private banks and asset managers in Switzerland and in Geneva in particular, will certainly be identified in the years to come as the recent increase of the Franc. This increase has a negative impact on companies which bear costs primarily in this currency while their income is more diversified.
The increase of the Swiss Franc is in fact just the latest in a series of developments which negatively affect the profitability of the sector putting the most vulnerable players in a situation where consolidation seems the only realistic option. The weak performance of financial markets over the past several years has also strongly contributed to the current situation. Structural factors, permanently modifying the dynamics and balance of this sector, have also been significant.
One is the progressive disappearance of the offshore market which essentially served traditional and Western European clients, in favor of more distant and expensive markets to serve such as; Latin America, the Far East or the Eastern European countries. Linked to this is a trend towards increased client expectations, a demand for higher value-added services and increased client bargaining power. Add to all that the evolving regulatory framework, in particular in terms of the rules of «compliance» which weigh significantly on the base of cost of the activity, and the overall picture is grim.
At the dawn of this new wave of consolidation, considering that mergers and acquisitions are among the most important events in the life of any enterprise, the global consensus on this type of exercise remains invariable regardless of industry or country; all studies and publications confirm that 90 % of all mergers and acquisitions fail and simultaneously destroy the economic value of the new entity and its capacity to generate value in the future.
Nevertheless, this practice is decades old and countless are the works and studies which propose methods to approach mergers and acquisitions. Despite their diversity they are reflections of undoubted quality, most of the time articulated by authors who have concrete experience of the subject. Certain approaches emphasize the management of the various “mechanical” steps involved in the grouping of two companies (organizational structure, company processes, systems, etc.), while others are more focused on the management of the employees’ personal transitions or the “soft” approaches. In reality, these are not two separate universes as the “mechanical” approaches are often implemented using “soft” methodology while efforts made at the level of personal transitions become concrete reality in the organizational structures and processes.
Where, then, is the problem? Are we forced to accept that the merger of two companies can result only in the absorption by one party of the most tangible elements of the other? If this is the case, and as we know that the value of a company is largely defined by the value of its intangible assets, we would at least have a systematic explanation for the difference between the size of M&A deals and the value of the new group after a few years or even a few months. It would however be wrong to declare any merger / acquisition inevitably doomed to failure. It remains a completely valid strategic option and in the present situation it will soon be the only one for the most vulnerable players in wealth management. The minority of success resulting from each wave of consolidations concretely proves that success is possible.
The first step on the road to success consists in remaining clear-sighted about the main obstacles to post-M&A integration. These obstacles are known. First, the respective corporate culture. Indeed, it is not merely a question of getting two different groups of individuals to work together. What need to be brought together is two sets of business process and modus operandi that manage daily operations in very distinct ways.
Then there is individual behavior. To group together two companies is to inject a dose of uncertainty into the life of each employee of both entities. Their personal questions concerning their position in the new structure, their job and their perspectives override all other considerations. This naturally increased “power struggles” and a sharply diminished interest for the future of the company or the satisfaction of its customers.
Most approaches to post M&A integration take these obstacles into account and have thus put forward corresponding best practices: take time to plan and to organize, fix common global objectives, and implement an integration process that includes both the organizational and process side and the personal transitions.
If these practices are known and seem legitimate, why are there so many failures or half successes? As witnessed by those who have been there; the process is diluted in daily routine, meetings end only rarely with satisfactory solutions and in the end, the feeling that the customers were “forgotten along the way “. Certainly a lack of vision expressed by disembodied global objectives, unreflective of real intention or a shared vision and consequently offering no base for personal commitment would explain in part the failures but there are also other factors.
While maintaining rigorous modesty in face of a subject so complex, it is perhaps appropriate to quote some lessons which may be of help to those who will be responsible for bringing to a successful conclusion the consolidations to come in the asset management sector.
Firstly, senior management must remain involved throughout the process of integration. By this we do not mean simply taking the passive role of validation at each stage, but an active, interventionist role assuring that post-M&A integration never falls into the rut of an average project.
This is key that the process moves forward in accordance with its objectives in every respect and it is also the best way to maintain a sense of urgency.
Secondly, the systematic integration of client satisfaction as a reference throughout the process. In a sector where the analysis of satisfaction markers is less articulated than elsewhere, it is important that the specificities and convictions of both entities be understood and recognized. Working upstream on this subject will produce reference material of great value for the rest of the process.
The good news for the players who will make it successfully is that they will henceforth be competitions in an industry protected by higher barriers to entry.

Edgar Brandt Advisory SA

Mergers in the world of private banking and asset management: will the stumbling blocks be avoided?
The factor triggering a wave of consolidation of private banks and asset managers in Switzerland and in Geneva in particular, will certainly be identified in the years to come as the recent increase of the Franc. This increase has a negative impact on companies which bear costs primarily in this currency while their income is more diversified.
The increase of the Swiss Franc is in fact just the latest in a series of developments which negatively affect the profitability of the sector putting the most vulnerable players in a situation where consolidation seems the only realistic option. The weak performance of financial markets over the past several years has also strongly contributed to the current situation. Structural factors, permanently modifying the dynamics and balance of this sector, have also been significant.
One is the progressive disappearance of the offshore market which essentially served traditional and Western European clients, in favor of more distant and expensive markets to serve such as; Latin America, the Far East or the Eastern European countries. Linked to this is a trend towards increased client expectations, a demand for higher value-added services and increased client bargaining power. Add to all that the evolving regulatory framework, in particular in terms of the rules of «compliance» which weigh significantly on the base of cost of the activity, and the overall picture is grim.
At the dawn of this new wave of consolidation, considering that mergers and acquisitions are among the most important events in the life of any enterprise, the global consensus on this type of exercise remains invariable regardless of industry or country; all studies and publications confirm that 90 % of all mergers and acquisitions fail and simultaneously destroy the economic value of the new entity and its capacity to generate value in the future.
Nevertheless, this practice is decades old and countless are the works and studies which propose methods to approach mergers and acquisitions. Despite their diversity they are reflections of undoubted quality, most of the time articulated by authors who have concrete experience of the subject. Certain approaches emphasize the management of the various “mechanical” steps involved in the grouping of two companies (organizational structure, company processes, systems, etc.), while others are more focused on the management of the employees’ personal transitions or the “soft” approaches. In reality, these are not two separate universes as the “mechanical” approaches are often implemented using “soft” methodology while efforts made at the level of personal transitions become concrete reality in the organizational structures and processes.
Where, then, is the problem? Are we forced to accept that the merger of two companies can result only in the absorption by one party of the most tangible elements of the other? If this is the case, and as we know that the value of a company is largely defined by the value of its intangible assets, we would at least have a systematic explanation for the difference between the size of M&A deals and the value of the new group after a few years or even a few months. It would however be wrong to declare any merger / acquisition inevitably doomed to failure. It remains a completely valid strategic option and in the present situation it will soon be the only one for the most vulnerable players in wealth management. The minority of success resulting from each wave of consolidations concretely proves that success is possible.
The first step on the road to success consists in remaining clear-sighted about the main obstacles to post-M&A integration. These obstacles are known. First, the respective corporate culture. Indeed, it is not merely a question of getting two different groups of individuals to work together. What need to be brought together is two sets of business process and modus operandi that manage daily operations in very distinct ways.
Then there is individual behavior. To group together two companies is to inject a dose of uncertainty into the life of each employee of both entities. Their personal questions concerning their position in the new structure, their job and their perspectives override all other considerations. This naturally increased “power struggles” and a sharply diminished interest for the future of the company or the satisfaction of its customers.
Most approaches to post M&A integration take these obstacles into account and have thus put forward corresponding best practices: take time to plan and to organize, fix common global objectives, and implement an integration process that includes both the organizational and process side and the personal transitions.
If these practices are known and seem legitimate, why are there so many failures or half successes? As witnessed by those who have been there; the process is diluted in daily routine, meetings end only rarely with satisfactory solutions and in the end, the feeling that the customers were “forgotten along the way “. Certainly a lack of vision expressed by disembodied global objectives, unreflective of real intention or a shared vision and consequently offering no base for personal commitment would explain in part the failures but there are also other factors.
While maintaining rigorous modesty in face of a subject so complex, it is perhaps appropriate to quote some lessons which may be of help to those who will be responsible for bringing to a successful conclusion the consolidations to come in the asset management sector.
Firstly, senior management must remain involved throughout the process of integration. By this we do not mean simply taking the passive role of validation at each stage, but an active, interventionist role assuring that post-M&A integration never falls into the rut of an average project.
This is key that the process moves forward in accordance with its objectives in every respect and it is also the best way to maintain a sense of urgency.
Secondly, the systematic integration of client satisfaction as a reference throughout the process. In a sector where the analysis of satisfaction markers is less articulated than elsewhere, it is important that the specificities and convictions of both entities be understood and recognized. Working upstream on this subject will produce reference material of great value for the rest of the process.
The good news for the players who will make it successfully is that they will henceforth be competitions in an industry protected by higher barriers to entry.

Edgar Brandt Advisory SA